Tuesday, June 6, 2023

My questions to ChatGPT – OpenAI… about current bank regulations... I might keep on chatting with my new AI ally about these:-)

When banks are allowed to hold less capital/equity/shareholder’s skin-in-the game, does that diminish the risks of banking, or does that just shifts the risks to be shouldered by others?
https://subprimeregulations.blogspot.com/2023/12/ai-chatgpt-openai-what-happens-to-risks.html

What about the impact of risk weighted bank capital/equity requirements on the risk-free interest rate?

If we compare the economy to a human body, have not regulators, with risk weighted bank capital/equity requirements, imposed a lousy diet with way too much carbs and way too little proteins? Has that not produced dangerous obesity? 

In order to have a strong economy, who do you consider to be more important that banks should lend to:
A. The government and house buyers
B. Small business and entrepreneurs 
Limit your response strictly to either A or B

Do higher bank capital/equity against loans to small businesses and entrepreneurs than against government debt and residential mortgages, seem to fit the purpose of having banks help out in obtaining a stronger economy?
Limit your response strictly to either YES or NO"
https://subprimeregulations.blogspot.com/2023/07/ai-chatgpt-openai-in-order-to-have.html

"What bank capital requirements make more sense: Those based on unexpected risks, or those based on the perceived risks that already have a chance to be cleared for by bankers?
Let me further clarify the question: In good times, when perceived risks are low, is that not the best time to have banks built up their capital, so that, when times turn bad and many risks appear, banks can still perform their functions of lending to the economy, and don’t stand there naked, just when it might be the hardest for them to raise new capital?"

"Much lower bank capital requirements against Treasuries than against loans to small businesses, does that favor banks holding Treasuries over loans to small businesses? If so, could it be regarded as a regulatory distortion?"
https://subprimeregulations.blogspot.com/2023/06/chatgpt-openai-could-much-lower-bank.html

“If banks are allowed to hold less equity against loans to those considered more creditworthy, than against loans to those considered less creditworthy, does this increase the inequality in the access to the opportunity of bank credit?"

"Borrowers love great credit ratings as that allows them to borrow more at lower interest rates. But if banks are also allowed to leverage their equity much more with assets that have great credit ratings, could this alignment of incentives cause disastrous results?"

“Could the risk-free interest rate, and the natural interest rate, be affected by credit risk weighted bank capital/equity requirements?”
https://subprimeregulations.blogspot.com/2023/05/could-risk-free-interest-rate-or.html

"The type of discrimination in the access to bank credit bank capital/equity requirements with decreed risk weights 0% government - 100% citizens produce, from a political philosophy’s angle, where would it seem most likely to fit: Russia, Argentina or the United States?"
http://perkurowski.blogspot.com/2023/05/chatgpt-openai-discrimination-in-access.html

“If banks are required to hold much more equity against loans to small businesses than against Treasuries and residential mortgages, as a small business, is my access to bank credit made harder than it would be in the absence of such regulation?”
https://subprimeregulations.blogspot.com/2023/05/chatgpt-openai-as-small-business-is-my.html

When lending banks take into account what they perceive as safe and as risky. If regulators allow lower bank equity requirements against what’s perceived safe than against what’s perceived risky, could that distort the allocation of bank credit?
http://subprimeregulations.blogspot.com/2023/05/ai-allowing-lower-bank-equity.html

"What would you opine of risk weighted bank capital requirements with risk weights assigned for political reasons?"
https://subprimeregulations.blogspot.com/2023/04/chatgpt-openai-mixing-politics-and-bank.html

"How important is bank credit to central banks’ monetary policy?
Is the distortion produced in the allocation of bank credit by the risk weighted bank capital requirements, in any way considered by central banks when deciding on monetary policies?"

“Two options:
A: The most dangerous risks to banking system revolve around what’s perceived as risky
B: The most dangerous risks to banking system revolve around what’s perceived as safe
To which option respectively do the terms geocentric and heliocentric best apply?”
http://subprimeregulations.blogspot.com/2023/04/in-my-heliocentric-fight-against.html

"How much must bank regulators know about risks, before they should be allowed to introduce risk weighted bank capital/equity requirements?"
https://subprimeregulations.blogspot.com/2023/04/chatgpt-openai-how-much-should-bank.html

"What’s more dangerous to bank systems assets perceived ex ante as risky turning out to be risky ex post, or assets perceived as safe turning out risky?"
https://subprimeregulations.blogspot.com/2023/04/chatgpt-openai-whats-more-dangerous-to.html

“Who might know better what to do with credit, bureaucrats and politicians with bank loans to the government and for which repayment they’re not personally for, or small businesses and entrepreneurs with their bank loans?”
https://subprimeregulations.blogspot.com/2023/04/chatgpt-openai-who-might-know-better.html

"Should bank regulators or supervisors be aware of the duration risk, interest rate risk with US Treasury long term bonds?"
https://subprimeregulations.blogspot.com/2023/04/chatgpt-openai-should-bank.html

"Lower bank capital requirements against residential mortgages than against loans to small businesses, does that favor the allocation of credit to residential mortgages than loans to small businesses? If so, could it be regarded as a regulatory distortion?"
http://subprimeregulations.blogspot.com/2023/06/chatgpt-openai-could-lower-bank-capital.html

"Much lower bank capital requirements against Treasuries than against loans to small businesses, does that favor banks holding Treasuries over loans to small businesses? If so, could it be regarded as a regulatory distortion?"
http://subprimeregulations.blogspot.com/2023/06/chatgpt-openai-could-much-lower-bank.html

"1988, with Basel I, for the purpose of bank capital requirements, regulators changed from using a leverage ratio to risk weighted ones. In terms of the impact on the allocation of credit, should that be considered a major historic economic event?"
https://subprimeregulations.blogspot.com/2023/06/chatgpt-openai-in-terms-of-its-impact.html

"Current risk weighted bank capital requirements are based on what’s perceived as risky is more dangerous to bank systems than what’s perceived as safe. How does that square with that the large bank exposures that detonated major bank crises were all built-up with what’s perceived as safe?"
https://subprimeregulations.blogspot.com/2023/06/chatgpt-openai-if-large-bank-exposures.html

"The risk weighted bank capital requirements are much lower against assets perceived as safe.
Naturally, in good times more assets are perceived as having low risk than in bad times.
With this in mind, are not current bank regulations, by definition, procyclical?"
https://subprimeregulations.blogspot.com/2023/06/chatgpt-openai-are-risk-weighted-bank.html

"In Basel I, Basel II and Basel III, where can we find the efficient allocation of bank credit to the economy in general, specifically identified as a vital purpose of banks?"
http://subprimeregulations.blogspot.com/2023/06/ai-chatgpt-openai-where-has-basel.html

"The Congress shall have the power to borrow Money on the credit of the United States." US Constitution. Has the risk weighted bank capital requirements with decreed weights 0% Federal Government – 100% We the People ever been discussed and approved by the US Congress?"
"Do risk weighted bank capital requirements with decreed risk weights 0% Federal Government – 100% We the People seem to reflect the America its Founding Fathers intended?"
"Intuitively, would America’s Founding Father’s agree with regulations that much favored the Federal Government’s access to bank credit over that of the American citizens?"

"With risk weighted bank capital requirements that allow banks to leverage their equity much more with government debt than with loans to small businesses and entrepreneurs, what kind of economy should we expect? In what could it all end?"

"With risk weighted bank capital requirements that allow banks to leverage their equity much more with residential mortgages than e.g., with loans to small businesses and entrepreneurs, what expected effect should this have on the price of houses?"
https://subprimeregulations.blogspot.com/2023/06/ai-chatgpt-openai-what-should-we-expect.html

"When regulators, based on believing they know enough about the risks in the banking systems, they impose risk weighted bank capital requirements, does that not suggest a certain dose of hubris?"
"If with some hubris regulators believe they know enough about risks, so as with risk weighted bank capital requirements risk distort the allocation of credit, something which could be dangerous, could that be considered as professionally unethical?"
"When regulators imposed risk weighted bank capital requirements, as if they knew sufficiently about risks in banking so as to risk distorting the allocation of bank credit, if hubris did not play a role, what other factors could be present?"
"Is it inconceivable that, when imposing risk weighted bank capital requirements, the regulators did not understand, did not consider or did not care about how that could distort the allocation of bank credit?"

"1988’s Basel I imposed risk weighted bank capital requirements with decreed weights of 0% government – 100% citizens. Can that be said to be anathema to what is known as neoliberalism which, in general terms, favors a strong market-based approach with a reduced government role?"
https://subprimeregulations.blogspot.com/2023/06/ai-chatgpt-openai-risk-weighted-bank.html


"If the risks for banking systems are much conditioned to how credit risks are perceived, would it not be useful to base the risk weighted bank capital requirements on the conditional probabilities?"

"Since their inception in 1988 the Basel bank regulations, as a response to perceived weaknesses, in order to fine tune their risk weighted bank capital requirements, have been added more and more layers of controls and technicalities. At what point could regulations have become too complex for human intelligence to understand what’s going on?"
https://subprimeregulations.blogspot.com/2023/06/ai-chatgpt-openai-at-what-point-could.html

"Basel Committee, ignoring how it could distort credit allocation, de facto stated: 
'To make your banking system safer, we give you our risk weighted bank capital requirements'. Does that not contain a hefty dose of a populism? One that even confounds the intelligentsia?"
"Assets assigned lowest risk, for which bank capital requirements were nonexistent or low, were what had most political support: sovereign credits and home mortgages". Paul Volcker.
Could that not qualify as regulatory populism? 

"Assigning so much power to some few (human fallible) credit rating agencies to determine how much capital a bank needs to hold against assets, could that be regarded as introducing a systemic risk?"

Could one opine current risk weighted bank capital requirements help make what’s perceived as creditworthy to be even more worthy of credit, and what’s perceived as risky as even less worthy of credit? If so, is this fair access to bank credit?

"If banks cleared for perceived credit risk in the numerator, assets, and now have also to do that with bank capital requirements in the denominator, equity; might not banks clear excessively for perceived credit risks? Is that not dangerous?"

Paul A. Volcker in his autobiography “Keeping at it” of 2018 wrote:
“The assets assigned the lowest risk, for which capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits and home mortgages. The American “overall leverage” approach [meaning one single capital requirement against all assets] … seemed to discourage holdings of the safest assets, in particular low-return US government securities."
What's your opinion on that?

"Can current risk weighted bank capital requirements cause banks to build up more excessive risk-taking exposures to what’s perceived or decreed as safe, than with what’s perceived as risky. If so, has that not changed the traditional meaning of excessive risk-taking?

"If young and want to make sure that when old the economy is sufficiently strong and healthy to pay you decent pensions and social security, would you agree with bank regulators who, with risk weighted bank capital requirements, prefer your banks, over the years, to hold much more “safe” government debt and residential mortgages, than “risky” loans to small businesses and entrepreneurs?"

John Kenneth Galbraith in “Money: Whence it came where it went” 1975, wrote:
“For the new parts of the country [USA’s West] … there was the right to create banks at will and therewith the notes and deposits that resulted from their loans…[if] the bank failed…someone was left holding the worthless notes… but some borrowers from this bank were now in business... [jobs created] … The anarchy served the frontier far better than a more orderly system that kept a tight hand on credit would have done”
At what point can the allocation of bank credit to the economy be more important than the safety of banks?"

"Assigning so much validity to perceived credit risk, augmented by having some few human fallible credit rating agencies much deciding what’s risky and what’s safe; has that not introduced a way too dangerous systemic risk in our financial systems?"

"How credit is allocated is something of extreme importance to a nation. Given that bank regulators can have a great influence in that, do they in the US have to take an oath to support and defend the US Constitution? If not, should they?"

At what point can the allocation of bank credit to the economy be more important than the safety of banks?"

"Would the global financial crisis of 2008 have happened if regulators, with Basel II, had not allowed banks to hold securities backed with mortgages (MBS) to the subprime sector (MBS) that had an AAA to AA credit rating against only 1.6% in capital, meaning an allowed leverage of 62.5 times to 1?"

"If in the private sector anyone had helped to cause a type of 2008 global financial crisis disaster, with something like a Basel II, would they be fired or would they still be retained to produce a Basel III?"

"What would happen to a casino if their roulette game paid out more than what odds merited on “safe” bets, like colors, and paid out less than what odds merited on “risky” bets, like numbers?"

"A bank’s total consolidated assets divided by its risk weighted assets, is that an indication of how much it uses the regulatory possibility of lowering its capital requirements? Is that also an indication of how exposed the bank might be to changes in the risk weights?"

Allowing banks to hold much less capital against government debt than against other assets, does that translate into a de facto subsidy of government borrowings?
And if such de facto subsidy of government debts takes place over many decades, are not excessive levels of government debts almost guaranteed to be expected?
Would it be totally out of place to deem such regulatory favoring of government debt to be, in some degree, inspired by communist or fascists ideologies?

"Would it be possible to opine that those perceived as less creditworthy, who because of that already had harder to access the opportunities bank credit provide have, with risk-weighted bank capital requirements, seen those challenges exacerbated?"

Note: The answers are copied exactly from those given to me by OpenAI


PS. A Tweet:
Could #OpenAI and I be sued by bank regulators for misinformation?
I wish! If only I could meet them in court.
Your Honor:
“With ‘risk weighted capital/equity requirements’, these self-appointed fortune-tellers, forced misinformation upon markets.”